Committees should act like committees
Lots of people wondered why the Fed didn’t raise rates at yesterdays’s meeting. Bloomberg offers one explanation:
Just before the FOMC silent period, the incoming vice chairman, Philip Jefferson, gave a speech on May 31 in which he clearly trailed that the Fed would “skip” this meeting:
A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.
This was a strong signal, and to go against it would have risked not only annoying the markets, but also offending the Fed’s new vice chairman. Ajay Rajadhyaksha, global chairman for research at Barclays Capital Inc., was one of the very few pundits to predict both that the Fed would pause this month only to add 50 basis points to its projected rate at year-end. He said that once Jefferson had made his speech, “they were committed to a June pause despite the data; you can’t have the incoming vice chair be proven immediately wrong.”
This is obviously not a good way to run a central bank. It’s just one more reason why I’ve often advocated having the FOMC adjust its target rate on a daily basis (to the nearest basis point), and set the target at the median vote of the FOMC.
PS. Bloomberg reports that Larry Summers is also skeptical:
“This meeting felt like it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “And that was a bit disturbing.”
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16. June 2023 at 06:05
The FOMC, and the Board of Governors, should follow the FED’s technical staff. They’re a lot more intelligent than the leaders. But they have little input sense Bernanke censored them.
16. June 2023 at 06:56
re: “adjust its target rate on a daily basis”
The desk shouldn’t target daily rates, it should target daily reserves. Greenspan created Black Monday by ignoring required reserves.
Volcker tried to tell it right: Pg. 105 in “Keeping At It”: “We needed a new approach. To have more direct impact, we could strictly limit growth in the reserves that commercial bans held at the Federal Reserve against their deposits. That would effectively curb growth in deposits and the overall money supply. Put simply, we would control the quantity of money (the money supply) rather than the price of money (interest rates). “
But Volcker targeted nonborrowed reserves when total legal reserves exploded at a 17% annual rate after the DIDMCA (contrary to Dr. Richard G. Anderson’s reconstruction).
16. June 2023 at 07:21
see: Divorcing Money from Monetary Policy
https://www.newyorkfed.org/medialibrary/media/research/epr/08v14n2/0809keis.pdf
“we follow the common practice of using the term monetary policy to refer to a central bank’s interest rate policy”
The money stock can never be properly managed by any attempt to control the cost of credit.
16. June 2023 at 15:26
Unimportant side note: Some central banks meet monthly.
By the way, I wish Scott Sumner would do a piece on Bank Indonesia buying bonds directly from the national government, during the pandemic.
17. June 2023 at 04:36
@ Solon of the East
It’s absurd to hand over the public purse in this manner for no other reason than Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.
“A scorpion asks a frog to carry it across a river. The frog hesitates, afraid of being stung, but the scorpion argues that if it did so, they would both drown. Considering this, the frog agrees, but midway across the river the scorpion does indeed sting the frog, dooming them both. When the frog asks the scorpion why, the scorpion replies that it was in its nature to do so.”
18. June 2023 at 05:46
The FOMC operates a “smoke screen”, an administered rate policy, not a money policy (or a balance sheet policy).
The money policy is contractionary, i.e., uptake in the Treasury’s General Fund Account, and the $95b monthly contraction in assets (split between $60 billion of Treasuries and $35 billion of MBS).
Interest is the price of credit (bank credit, plus nonbank savings). The price of money is the reciprocal of the price level (based on specialized price indices).
Waller, Williams, and Logan seem to agree. They “believe the Fed can keep unloading bonds even when officials cut interest rates at some future date.”
The FED should cut interest rates now, and continue with QT. The 1966 Interest Rate Adjustment Act is prima facie evidence.
The FED’s Ph.Ds. have learned their catechisms, that there is no difference between money and liquid assets.
19. June 2023 at 04:43
This ‘pause’ or ‘skip’ or whatever people want to call it is absolutely inane. All evidence suggests there are no broad/general banking issues in the US.
Why Jefferson felt he should give that comment is beyond me.
19. June 2023 at 20:53
Not on topic but…
https://twitter.com/nypost/status/1670749588280451079
When I saw the TDS (Trump Derangement Syndrome) crowd, begin to cry about how this artist’s sketch was “too good looking” I just had to post so that Sumner gets angry. We know Scott is part of the anti-trumper, never-trumper, trump is hitler, OMG we will all die because Trump is in office lunatic crowd, so this tweet should make him rage uncontrollably for a couple weeks.
Quick. Ban the NY post for spreading “Misinformation.” Wouldn’t want those Biden emails to get out. How dare they draw a good looking Trump.
LOL.
21. June 2023 at 04:47
QT should be accelerated, and the administered rates dropped. M2 might have dropped by $759 billion since October 2022, but large CDs have increased by $403 billion since then (and large CDs aren’t included in M2).
In the commercial banking system, time deposits are just demand deposits that have shifted deposit classifications. That’s how both fractional reserve and prudential reserve banking systems work. Banks are not intermediary financial institutions. Deposits are the result of lending, not the other way around.
21. June 2023 at 05:19
In the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy
https://www.federalreserve.gov/monetarypolicy/files/20230616_mprfullreport.pdf
“The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates”
“Waller indicates that he is open to conducting QT while also cutting rates.”
That’s the prescription. Interest is the price of credit. The price of money is the reciprocal of the price level.
You drain reserves (like Bernanke did), and then gradually drive the banks out of the savings business (which doesn’t reduce the size of the payment’s system).
21. June 2023 at 11:04
As fantastic as it sounds, economics is an exact science (like Irving Fisher said). But people like Jerome Powell don’t get money and central banking. Powell thinks banks are intermediaries between savers and borrowers. Powell’s peanut sized brain thinks in terms of an individual bank, as opposed to the commercial banking system as a whole (i.e., conceptually).
All time deposits are derived from demand deposits. As time deposits grow, demand deposits are depleted dollar for dollar. It’s a closed system. All deposits are the result of lending, not the other way around.
And saver-holders never transfer their savings outside of the banks unless they are hoarding currency or convert it to another national currency, e.g., FDI.
“Liquidity Regulation” went the way of Regulation Q Ceilings.
Chat GPT: “The rationale for Regulation Q ceilings was to protect the profitability and stability of banks by reducing their cost of funding and discouraging excessive competition for deposits23. However, the regulation also had unintended consequences, such as creating a gap between market interest rates and deposit rates, encouraging disintermediation (the movement of funds from banks to other financial institutions that could offer higher returns), and stimulating the growth of money market funds and other alternatives to bank deposits.”
That’s the pervasive thinking. In reality, unknown to Chat GPT, the NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. I.e., since 1933 disintermediation is a term that only applies to the nonbanks.
You can’t trust machine learning. And you can’t trust Powell.
21. June 2023 at 12:17
Or alternatively stop trying to control the quantity of money in the economy and just let it float to where it wants to be.
We don’t decide how many apples and tomatoes to supply.
Demand isn’t infinite for money either. Creditworthiness is a finite resource. Therefore the market can determine the appropriate level of supply and price just as it does apples and tomatoes.
We don’t need centrally planned artificial interventions by wonks in ivory towers.
It’s not money supply that matters. It’s money flow.
The market for money is not the place for the system stabilisation policy. That is better dealt with via a price anchor – as MMT explains.
21. June 2023 at 21:03
“We don’t decide how many apples and tomatoes to supply.”
Who is we? Apple suppliers?
22. June 2023 at 04:25
O/N RRP volumes dipped below 2 trillion. MMMF rates, T-bills, are now higher than the award rate. That increases liquidity.
23. June 2023 at 11:38
Agree we should do daily rate change. It’s hard to believe Jefferson does not realize how stupid he seems. Maybe we should have lowered rates by 100bp and raise it by 150 at next meeting. Think of all the extra information we could have! Also, imagine if the Barclays Capital guy is correct in his logic. That’s quite a damning statement about the idiocy of the Fed. What happened to these guys?
I have never seen a Fed so in your face stupid—led by Powell of course. . At least when Bernanke was wrong it was relatively complex situation